Can Iran's economy sustain a war with Israel?

As the United States and European Union (EU) consider new economic measures against Iran, the Islamic Republic is touting its resilience to Western boycotts. According to the government in Tehran, the country has exported more oil than ever in the last six years, despite the massive sanctions former US president Donald Trump imposed in 2018.

Last month, Iran's Oil Minister Javad Owji said that oil exports had "generated more than $35 billion [€32.8 billion]" in 2023. The British business daily Financial Times quoted him as saying that while Iran's enemies wanted to stop its exports, "today, we can export oil anywhere we want, and with minimal discounts."

To Iran's regime, the billions of dollars in oil revenue are instrumental in maintaining acquiescence at home. A large part of the population suffers from the effects of international sanctions, which have led to a depreciation of the national currency, the rial.

Soaring inflation

Iranian inflation reached new heights recently, climbing to about 40% in February. Any exacerbation due to escalating geopolitical tensions would only stoke consumer prices further, Djavad Salehi-Isfahani, an economics professor at the Virginia Polytechnic Institute and State University, told DW.

He also noted that the US dollar had gained about 15% against the Iranian rial in recent weeks amid expectations of heightened conflict with Israel.

"This exchange rate devaluation very quickly translates into higher prices, because Iran imports a lot of types of commodities, and many of the commodities it produces inside Iran also have an import component," the Middle East expert said, adding that the country is "bracing for higher inflation."

According to Salehi-Isfahani, the living standard of Iran's middle class has also steeply declined in the past decades, and is now "back to 20 years ago."

Oil the main moneymaker

According to German data provider Statista, the most important contributor to Iran's gross domestic product (GDP) in 2022 was the services sector with 47%, followed by industry (40%), and agriculture (12.5%).

Most of the industrial sector's revenue comes from the oil industry, with more than 90% of crude oil being shipped to China. Western sanctions have had little impact on Iran's oil trade with Beijing, but Iranian leaders are increasingly concerned that oil installations could become the target of an Israeli military attack.

After the initial shock following Trump's 2018 sanctions, Iran has now reached 80% of its former export volume. Most experts attribute this to the easing of sanctions since US President Joe Biden took office.

"Iran's economy has indeed grown in part due to the increase in oil exports... the GDP increase amounts to about 5% per year, which is not bad compared to what has happened in the region overall after the COVID-19 pandemic," Salehi-Isfahani said. He added that many financial resources had been invested in expanding the military and other measures that would stabilize the regime.

Corruption and lack of transparency

In Iran, significant amounts of state income are said to disappear into the opaque structures of the government in Tehran. The Corruption Perception Index by the international organization Transparency International ranks Iran in place 149 of 180 countries.

The Islamic Revolutionary Guard Corps (IRGC) — a paramilitary elite force within the armed forces — and numerous religious organizations reportedly control central parts of the economy. They do not pay taxes, and do not have to submit balance sheets. They are primarily subject to Iran's head of state and commander-in-chief, Supreme Leader Ayatollah Ali Khamenei.

Although oil export revenues have increasingly stabilized in recent years, Iran is anything but an economic heavyweight contender. With a population of around 88 million, it is almost ten times larger than Israel, home to 9 million. But its GDP in 2022 was significantly lower, ending the year at $413 billion, compared to Israel's $525 billion.